Question 1

Which one of these is considered to be the best reason for obtaining a capital lease?

Accepted Answer

A)  To benefit from the implicit interest rate of a lease 
B)  To extend payments over a period of time 
C)  To avoid the restrictive covenants often found in loan agreements 
D)  To reduce the liabilities shown on the firm's balance sheet 
E)  To obtain 100 percent financing 
A)  To benefit from the implicit interest rate of a lease 
B)  To extend payments over a period of time 
C)  To avoid the restrictive covenants often found in loan agreements 
D)  To reduce the liabilities shown on the firm's balance sheet 
E)  To obtain 100 percent financing

Question 2

Lester's is analyzing a purchase versus a lease for some equipment costing $52,800, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The firm can borrow money at 6.5 percent and has a tax rate of 21 percent. What is the amount of the depreciation tax shield in Year 3?

Accepted Answer

A)  $1,758 
B)  $1,643 
C)  $1,941 
D)  $2,012 
E)  $2,221 
A)  $1,758 
B)  $1,643 
C)  $1,941 
D)  $2,012 
E)  $2,221

Question 3

A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease.

Accepted Answer

A)  open 
B)  straight 
C)  operating 
D)  tax-oriented 
E)  tax-exempt 
A)  open 
B)  straight 
C)  operating 
D)  tax-oriented 
E)  tax-exempt

Question 4

What does the IRS require if lease payments are to be tax deductible?

Accepted Answer

A)  The lease term must be less than the life of the asset. 
B)  The lease payments must be less than comparable loan payments if the asset were purchased. 
C)  The initial present value of the lease payments must be less than 90 percent of the asset cost. 
D)  The lessee should have the option to purchase the asset at a discounted price at the end of the lease term. 
E)  The lease must be primarily for business purposes. 
A)  The lease term must be less than the life of the asset. 
B)  The lease payments must be less than comparable loan payments if the asset were purchased. 
C)  The initial present value of the lease payments must be less than 90 percent of the asset cost. 
D)  The lessee should have the option to purchase the asset at a discounted price at the end of the lease term. 
E)  The lease must be primarily for business purposes.

Question 5

Which one of the following is an indicator that a lease is an operating lease for accounting purposes?

Accepted Answer

A)  The lease transfers ownership of the asset to the lessee by the end of the lease term. 
B)  The lessee will probably exercise the option to purchase the leased asset. 
C)  The lease term represents a minor portion of the leased asset's economic life. 
D)  The residual value plus the present value of the lease payments exceeds the value of the leased asset. 
E)  The lessor has no use for the asset other than to lease it to the present lessee due to the specialized nature of that asset. 
A)  The lease transfers ownership of the asset to the lessee by the end of the lease term. 
B)  The lessee will probably exercise the option to purchase the leased asset. 
C)  The lease term represents a minor portion of the leased asset's economic life. 
D)  The residual value plus the present value of the lease payments exceeds the value of the leased asset. 
E)  The lessor has no use for the asset other than to lease it to the present lessee due to the specialized nature of that asset.

Question 6

Cool Treats is considering either leasing or buying a new $30,900 freezer unit. The lessor will charge $11,900 a year for a two-year lease. The freezer has a two-year life after which time it is expected to have a resale value of $11,500. Cool Treats uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient operating losses to offset any potential taxable income the firm might have over the next four years. What is the net advantage to leasing?

Accepted Answer

A)  −$167 
B)  $238 
C)  $258 
D)  −$270 
E)  −$419 
A)  −$167 
B)  $238 
C)  $258 
D)  −$270 
E)  −$419

Question 7

Jamestown Supply is considering leasing some equipment for four years at an annual payment of $16,900. The firm has a pretax borrowing cost of 7.5 percent and a tax rate of 21 percent. What is the amount of the aftertax lease payment?

Accepted Answer

A)  $16,103 
B)  $12,250 
C)  $12,667 
D)  $13,351 
E)  $13,820 
A)  $16,103 
B)  $12,250 
C)  $12,667 
D)  $13,351 
E)  $13,820

Question 8

Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this?

Accepted Answer

A)  Open 
B)  Straight 
C)  Operating 
D)  Financial 
E)  Tax-oriented 
A)  Open 
B)  Straight 
C)  Operating 
D)  Financial 
E)  Tax-oriented

Question 9

Pressley's Inc. can purchase some equipment for $620,000 that has a life of four years, after which it will be worthless. The pretax cost of borrowed funds is 7.8 percent and the corporate tax rate is 21 percent. The firm expects significant operating losses for at least the next five years and thus expects to pay no taxes during this period. The equipment can be leased for $182,000 a year. What is the net advantage to leasing?

Accepted Answer

A)  $14,500 
B)  −$3,431 
C)  $13,754 
D)  $20,628 
E)  −$7,967 
A)  $14,500 
B)  −$3,431 
C)  $13,754 
D)  $20,628 
E)  −$7,967

Question 10

A financial lease:

Accepted Answer

A)  usually requires the lessor to maintain the leased asset. 
B)  is generally cancelable without penalty if the lessee provides 30 days advance notice. 
C)  is generally a partially amortized lease. 
D)  is generally a short-term lease. 
E)  may also be classified as a tax-oriented lease. 
A)  usually requires the lessor to maintain the leased asset. 
B)  is generally cancelable without penalty if the lessee provides 30 days advance notice. 
C)  is generally a partially amortized lease. 
D)  is generally a short-term lease. 
E)  may also be classified as a tax-oriented lease.

Question 11

An asset costs $640,000 and would be depreciated in a straight-line manner over its 4-year life. It will have no salvage value. The tax rate is 21 percent and the pretax cost of borrowing is 9 percent. What lease payment on this asset will make the lessee and the lessor equally well off?

Accepted Answer

A)  $185,717 
B)  $194,141 
C)  $167,778 
D)  $197,235 
E)  $165,026 
A)  $185,717 
B)  $194,141 
C)  $167,778 
D)  $197,235 
E)  $165,026

Question 12

Turner's has decided to modernize its production facility by acquiring $2.4 million in new fixed assets that will be depreciated straight-line to zero over five years. This equipment will have no salvage value but will provide $1,880,000 in annual pretax cost savings. Turner's tax rate is 21 percent and its pretax cost of debt is 8.6 percent. Thrifty Leasing has offered a 5-year lease on this equipment with annual payments due at the beginning of each year. What is the maximum lease payment that would be acceptable to Turner's?

Accepted Answer

A)  $593,231 
B)  $570,497 
C)  $404,506 
D)  $406,318 
E)  $611,472 
A)  $593,231 
B)  $570,497 
C)  $404,506 
D)  $406,318 
E)  $611,472

Question 13

The Box Store is considering the purchase of a delivery truck costing $49,000. The truck can be leased for three years at $19,500 per year or it can be purchased at an interest rate of 7.5 percent. The estimated life of the truck is three years. The corporate tax rate is 21 percent. The company does not expect to owe any taxes for the next several years due to large operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing?

Accepted Answer

A)  -$1,710 
B)  -$864 
C)  $1,304 
D)  −$1,006 
E)  $1,794 
A)  -$1,710 
B)  -$864 
C)  $1,304 
D)  −$1,006 
E)  $1,794

Question 14

A firm can either lease or buy some equipment costing $72,900. The lease payments would be $18,500 a year for four years. The equipment has a 4-year life after which it is expected to have a resale value of $3,600. The firm uses straight-line depreciation over the life of the asset, borrows money at 11 percent, and has a tax rate of 21 percent. The company does not expect to owe any taxes for at least four years because of its operating losses. What is the incremental cash flow for Year 3 if the company decides to lease rather than purchase the equipment?

Accepted Answer

A)  −$29,165 
B)  −$21,821 
C)  −$18,500 
D)  −$18,559 
E)  −$17,635 
A)  −$29,165 
B)  −$21,821 
C)  −$18,500 
D)  −$18,559 
E)  −$17,635

Question 15

MIG Tools can either lease or buy some equipment. The lease payments would be $12,800 a year and the purchase price is $35,900. The equipment has a 3-year life after which it is expected to have a resale value of $5,000. The firm uses 100 percent bonus depreciation, borrows money at 8 percent, and has a tax rate of 21 percent. What is the incremental cash flow for Year 1 if the company decides to lease the equipment rather than purchase it?

Accepted Answer

A)  −$19,405 
B)  −$16,805 
C)  −$17,651 
D)  −$14,184 
E)  −$14,905 
A)  −$19,405 
B)  −$16,805 
C)  −$17,651 
D)  −$14,184 
E)  −$14,905

Question 16

Ft. Myers Marina can lease $31,800 of equipment for $7,200 a year for five years. If purchased, the equipment would be depreciated over its 5-year life and then have a resale value of $5,900. The firm uses straight-line depreciation, borrows at 8 percent, and has a tax rate of 21 percent. What is the net advantage to leasing?

Accepted Answer

A)  −$851 
B)  −$1,022 
C)  −$961 
D)  −$808 
E)  −$1,211 
A)  −$851 
B)  −$1,022 
C)  −$961 
D)  −$808 
E)  −$1,211

Question 17

A leveraged lease is a:

Accepted Answer

A)  lease where the lessee is the owner of the asset for tax purposes. 
B)  sale and leaseback arrangement. 
C)  type of operating lease. 
D)  lease paid with money borrowed by the lessee. 
E)  lease where the lessor borrows on a nonrecourse basis. 
A)  lease where the lessee is the owner of the asset for tax purposes. 
B)  sale and leaseback arrangement. 
C)  type of operating lease. 
D)  lease paid with money borrowed by the lessee. 
E)  lease where the lessor borrows on a nonrecourse basis.

Question 18

CT Motors borrows money at 8.35 percent, uses straight-line depreciation, and has a tax rate of 21 percent. The firm's break-even aftertax annual lease payment on a machine is $15,306. What amount would CT Motors pay to the lessor annually to break-even?

Accepted Answer

A)  $18,992 
B)  $18,403 
C)  $17,620 
D)  $19,914 
E)  $19,375 
A)  $18,992 
B)  $18,403 
C)  $17,620 
D)  $19,914 
E)  $19,375

Question 19

Which one of the following statements is correct?

Accepted Answer

A)  The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges. 
B)  The lessor is primarily concerned about the use of the asset. 
C)  If a computer manufacturer leased computers it built to others, it would be engaging in leveraged leasing. 
D)  A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use. 
E)  Lessors provide a source of financing for lessees. 
A)  The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges. 
B)  The lessor is primarily concerned about the use of the asset. 
C)  If a computer manufacturer leased computers it built to others, it would be engaging in leveraged leasing. 
D)  A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use. 
E)  Lessors provide a source of financing for lessees.

Question 20

A financial lease:

Accepted Answer

A)  is generally called a capital lease by accountants. 
B)  requires the lessor to maintain the asset. 
C)  is a partially amortized lease. 
D)  is often called a single net lease. 
E)  can generally be cancelled without penalty. 
A)  is generally called a capital lease by accountants. 
B)  requires the lessor to maintain the asset. 
C)  is a partially amortized lease. 
D)  is often called a single net lease. 
E)  can generally be cancelled without penalty.

Which one of these is considered to be the best reason for obtaining a capital lease?

A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease.

What does the IRS require if lease payments are to be tax deductible?

Which one of the following is an indicator that a lease is an operating lease for accounting purposes?

Jamestown Supply is considering leasing some equipment for four years at an annual payment of $16,900. The firm has a pretax borrowing cost of 7.5 percent and a tax rate of 21 percent. What is the amount of the aftertax lease payment?

Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this?

A financial lease:

An asset costs $640,000 and would be depreciated in a straight-line manner over its 4-year life. It will have no salvage value. The tax rate is 21 percent and the pretax cost of borrowing is 9 percent. What lease payment on this asset will make the lessee and the lessor equally well off?

A leveraged lease is a:

CT Motors borrows money at 8.35 percent, uses straight-line depreciation, and has a tax rate of 21 percent. The firm's break-even aftertax annual lease payment on a machine is $15,306. What amount would CT Motors pay to the lessor annually to break-even?

Which one of the following statements is correct?

A financial lease:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters

Exam 27: Leasing

Which one of these is considered to be the best reason for obtaining a capital lease?

A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease.

What does the IRS require if lease payments are to be tax deductible?

Which one of the following is an indicator that a lease is an operating lease for accounting purposes?

Jamestown Supply is considering leasing some equipment for four years at an annual payment of $16,900. The firm has a pretax borrowing cost of 7.5 percent and a tax rate of 21 percent. What is the amount of the aftertax lease payment?

Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this?

A financial lease:

An asset costs $640,000 and would be depreciated in a straight-line manner over its 4-year life. It will have no salvage value. The tax rate is 21 percent and the pretax cost of borrowing is 9 percent. What lease payment on this asset will make the lessee and the lessor equally well off?

A leveraged lease is a:

CT Motors borrows money at 8.35 percent, uses straight-line depreciation, and has a tax rate of 21 percent. The firm's break-even aftertax annual lease payment on a machine is $15,306. What amount would CT Motors pay to the lessor annually to break-even?

Which one of the following statements is correct?

A financial lease:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters